Final answer:
Upon receipt of the $700 payment from Cambridge Savings Bank, the accounting equation for Cardullo's remains in balance. The company's accounts receivable decreases and cash increases by the same amount, with no change in liabilities or owner's equity. This enhances liquidity but does not affect the total assets, liabilities, or equity.
Step-by-step explanation:
When Cardullo's receives payment from Cambridge Savings Bank for the gift baskets, the transaction has specific implications on the company's accounting equation. The accounting equation states that Assets = Liabilities + Owner's Equity. Initially, when the gift baskets were sold on credit, Cardullo's would have recorded an accounts receivable of $700 (an asset), and an increase in sales (which impacts owner's equity). The cost of the items sold, which was $400, would have been recorded as cost of goods sold (expense), reducing the owner's equity. Therefore, when the payment is received 30 days later, the accounts receivable asset is reduced by $700, and the cash asset increases by $700, leaving the accounting equation balanced, as there are no changes to liabilities or owner's equity from this transaction alone.
The reception of the payment clears the accounts receivable that stood at $700, meaning Cardullo's has converted this asset into cash, hence keeping the total assets unchanged. The often overlooked aspect is that while there is no change in the total assets, the composition of the assets shifts from accounts receivable to cash, leading to no net effect on the company's financial position as per the accounting equation.
Therefore, the key takeaway here is that the receipt of cash payment does not alter the total value of the assets, liabilities, or equity - but it does improve liquidity as cash is more liquid than accounts receivable. This event boosts the short-term financial flexibility of Cardullo's without impacting their profitability or financial stability, as depicted by the unchanged accounting equation post-payment.